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Document of The World Bank ReportNo: 20701 LV Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT ONA Public Disclosure Authorized PROPOSED LOAN IN THE AMOUNT OF US$ 21.66 MILLION AND EUR 15.66 MILLION (US$14.5 MILLION EQUIVALENT) TO RIGAS SILTUMS FOR A Public Disclosure Authorized LATVIA RIGA DISTRICT HEATING REHABILITATION PROJECT June 30, 2000 Public Disclosure Authorized Energy Department Europe and Central Asia Regional Office CURRENCYEQUIVALENTS (Exchange rate as of June 2000) Currency Unit = Lat (Ls) US$ 1.00 = 0.59 Lat BORROWER'SFISCAL YEAR October 1 - September 30 ABBREVIATIONSAND ACRONYMS CAS Country Assistance Strategy CFC Chlorofluorocarbon CHP Combined Heat and Power Plant DH District Heating ERB Energy Regulatory Board ERR. Economic Rate of Return FRR Financial Rate of Return FSU Former Soviet Union Gcal Giga calorie HOEI Heat-Only-Boiler ICB International Competitive Bidding IS International Shopping LIB Limited International Bidding LRMC Long-Run Marginal Cost NCB National Competitive Bidding NIB Nordic Investment Bank NPV Net Present Value NS National Shopping PMR Project Management Report VAT Value-Added Tax Vice President: Mr. Johannes Linn Country Manager/Director: Mr. Basil Kavalsky Sector Manager: Mr. Henk Busz Tearn Leader: Ms. Carolyn Gochenour LATVIA Riga District Heating Rehabilitation Project TABLE OF CONTENTS Page No. A Project Development Objective ............................................................... 2 1. Project DevelopmentObjective ............................................................... 2 2. Key PerformanceIndicators ............................................................... 2 B Strategic Context............................................................... 2 1. Sector-RelatedCountry Assistance Strategy (CAS) Goal Supported by the Project................... 2 2. Main Sector Issues and Government Strategy .................................. ............................. 2 3. Sector Issues to be Addressed by the Project and Strategic Choices........................................... 5 C Project Description Summary............................................................... 7 1. Project Components............................................................... 7 2. Key Policy and Institutional Reforms Supportedby the Project.................................................. 8 3. Benefits and Target Population ............ ................................ I. ................. 9 4. Institutionaland Implementation Arrangements.......................................... ..................... 9 D Project Rationale .............................................................. 14 1. Project Altematives Considered and Reasons for Rejection...................................................... 14 2. Major Related Projects Financed by the Bank and/or other Development Agencies................ 14 3. Lessons Learned and Reflected in the Project Design.............................................................. 14 4. Indications of Borrower Commitmentand Ownership.............................................................. 15 5. Value Added of Bank Support in this Project.............................................................. 16 E Summary Project Analyses.............................................................. 17 1. Economic.............................................................. 17 2. Financial.............................................................. 19 3. Technical.............................................................. 24 4. Institutional.............................................................. 24 5. Social.............................................................. 25 6. EnvironmentalAssessment .............................................................. 26 7. ParticipatoryApproach .............................................................. 27 F Sustainabilityand Risks.............................................................. 28 1. Sustainability.............................................................. 28 2. Critical Risks.............................................................. 28 3. Possible Controversial Aspects .............................................................. 30 G Main Loan Conditions.................... 31 1. EffectivenessConditions ................... 31 2. Agreements Reached During Negotiations.31 3. Condition of Disbursement.................... 32 H Readiness for Implementation .32 I Compliance with Bank Policies .32 Annexes Annex l Project Design Summary 33 Annex 2 Project Description 35 Annex 3 Estimated Project Costs 36 Annex 4 Cost-Benefit AnallysisSummary 37 Annex 5 Financial Summary for Rigas Siltums 46 Annex 6 Procurement and DisbursementArrangements 47 Table A Project Costs by Procurement Arrangements 50 Table Al Procurement Arrangements and Time Schedule 51 Table B Thresholds for ProcurementMethods and Prior Review 53 Table C Allocation of Loan Proceeds 54 Annex 7 Project Processing Schedule 55 Annex 8 Documents in the Project File 56 Annex 9 Social Assessment 57 Annex 10 Statement of Loans and Credits 89 Annex 1I Latvia at a Glance 90 Map IBRD 30632 Latvia Riga District Heating Rehabilitation Project Project AppraisalDocument Europe and CentralAsia Region Date: June 30, 2000 Team Leader: Ms. CarolynGochenour Country Manager/Director:Mr. Basil G. Kavalsky Sector Manager: Mr. Henk Busz Project ID: LV-PE-8530 Sector: Energy Lending Instrument: SL Theme(s): Energy Efficiency Poverty Targeted Intervention: 1 ] Yes [X] No Project FinancingData: [X] Loan [ ] Credit [ Grant [] Guarantee [ Other [Specifyl For Loans/Credits/Others: Amount: US$ 21.66 million and EUR 15.66 million (US$ 14.5 million equivalent) Proposed Terms: [ ] To be defined [ ] Multi-currency [ I Single currency StandardVariable [X] Fixed-spread, [ ] LIBOR-based US$ and EUR- denominated at the standard variable interest rate for US$ and EUR Grace period (years): 5 Years to maturity: 17 Commitment fee: 0.85% on undisbursed balances for first 4 years, standardcharge of 0.75% on undisbursed balances thereafter, beginning60 days after signing, less any waiver Front-end fee on Bank loan: 1.0% on principal amount, capitalized Financing Plan (US $m): [I Detailsto be defined Sources: Local Forein Total Rigas Siltums 43.8 6.7 50.5 Riga Municipality 2.7 2.5 5.2 World Bank 14.7 21.5 36.2 AB Svensk Exportkredit 26.6 26.6 Swedish Government Grant 2.1 2.1 Finnish Government and Other Grants 0.3 0.3 Commercial Banks' Loans 10.3 6.9 17.2 Total Cost + Front-end Fee 71.5 66.6 138.1 Borrower: Rigas Siltums Guarantor: Latvia Estimated Disbursements (Bank FY/US$M): FY 2001 2002 2003 2004 2005 Total Annual 2.2 9.1 13.0 8.8 3.0 36.2 Cumulative 2.2 11.3 24.4 33.1 36.2 Project ImplementationPeriod: CY 2000-2004 Expected EffectivenessDate: December 15, 2000 Expected Closing Date: June 30, 2005 Implementing Agency: Rigas Siltums Contact Person: Hugo Pavuls, Project Manager Address: Cesu Street 3, Riga, Latvia 1012 Tel: 371-7017240 Fax: 371-7 017 363 E-mail: [email protected] A: Project DevelopmentObjective 1. Project developmentobjective: (see Annex 1) The key development objective of the Riga District Heating (DH) RehabilitationProject is to optimize DH system operational performance, increase the efficiency of heat supply, distributionand consumption, improve the reliability of service delivery, enhance energy conservation and improve environmental conditions of Riga's district heating system through transmission and distribution network rehabilitation, substation modernization and new technologies, while promoting sound pricing policies and commercial practices to allow for the competitive development of Rigas Siltums and its possible eventual privatization. The project would also provide institutional support to Rigas Siltums. 2. Key performance indicators: (see Annex 1) The key performance indicators, as shown in Annex 1, include (a) share of heat utilized from CHP plants; (b) level of heat and hot water losses in the DH system; (c) bulk and retail heat tariffs; and (d) financial performance indicators of Rigas Siltums (e.g., debt service coverage ratio, current ratio, accounts receivables, profitability). B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 17706-LV Date of latest CAS discussion: 04/ 21/98 The sector-related goal stated in the CAS is to help Latvia address municipal, environmental and public utility issues and contribute to enhancing capacity in these areas, specifically by supporting the adoption of sound pricing policies and utility practices and the commercialization and institutional development of DH companies. This is expected to pave the way for their eventual privatization and for attraction of private capital. Substantial interest has been expressed by the donor and financial community to provide co-financing in this area if the Bank;is involved in helping Latvia to set the policy framework, especially in the area of energy pricing, and build the institutions in the sector. 2. Main sector issues and Governrnentstrategy: Sector Issues DH systems exist in all major Latvian cities and provide 70% of the national heat demand. DH systems provide most of the heat and hot water for urban dwellers as well as steam for industry, produced in combined-heat-and-power (CHP) plants or in heat-only-boiler (HOB) plants and transported through pipeline networks to block and/or individual substations and finally to buildings. In the capital city of Riga,